Clarke: Four More Takeaways From Moore

TaxProf Blog Op-Ed:  Four More Takeaways From Moore, by Conor Clarke (Washington University; Google Scholar):

Like everyone in the tax world, I read Thursday’s Moore opinion with great interest.  The result was both predictable and startling:  The government won on a narrow theory that many saw coming—but that win may be dulled by some mildly Pyrrhic elements that hint at unresolved conflicts to come.  More will certainly follow Moore.  Here are four quick reactions.

Kavanaugh’s dependability.  The central and narrow holding of Moore—that the 2017 tax at issue was a tax on realized income that did not need to be apportioned—was no surprise.  Here is what Kavanaugh (widely regarded as the likely swing justice in the case) said at the December oral argument: “[W]e have realization in this case. The entity realized income. The question then is attribution, and we’ve long held that Congress may attribute the income of the company to the shareholders or the partnership to the partners.”  And here is what Kavanaugh just wrote for the Court: “[T]he precise and narrow question that the Court addresses today is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income. This Court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, establish that the answer is yes.”  There was truth in advertising.  Kavanaugh plainly stated a view at argument, and then converted that view into a holding.  As Daniel Hemel and others noted after the argument, that view seemed likely to win the day.  It did.

The larger issue of “realization” lives to fight another day.  As suggested above, Kavanaugh took great pains to note that the Court was only answering a “precise and narrow question.”  The wider and more sprawling question was whether—as the famous, controversial, and rather elliptical 1920 case of Eisner v. Macomber is often read to suggest—realization is required for there to be a tax on “incomes” under the Sixteenth Amendment.  Many tax-law scholars (including the introductory casebook from which I teach) have long regarded Macomber—and the view that realization is constitutionally required—as an emphatically dead letter.  Justice Kavanaugh’s opinion suggests a breath of new life: “We do not decide that question today.”

In addition, no fewer than four Justices have now expressed the view that realization is a constitutional requirement.  In a concurring opinion, Justice Barrett (who some thought shared Kavanaugh’s views after argument, and who was joined by Justice Alito), noted her view that a realization requirement flows from the text of the Sixteenth Amendment: That amendment’s “reference to income ‘derived’ from any source,” she wrote, “encompasses a requirement that income, to be taxed without apportionment, must be realized.”  In his dissent (joined by Justice Gorsuch), Justice Thomas took the same view—that “[t]he text of the Sixteenth Amendment points to the concept of realization.”  The Wall Street Journal editorial page may be disappointed, but the express enthusiasm of these four justices for a constitutional realization requirement—combined with a five-justice majority that expressly declined to reach the issue—is a remarkable sea change for tax law and tax scholarship, which long viewed the issue as settled.

What will it mean?  For tax law, it means that constitutional litigation over tax issues is likely continue.  (As Reuven Avi-Yonah has suggested, one possible candidate for challenge is the relatively new repatriation tax at 26 U.S.C. § 877A, which is intended to reach the unrealized appreciation of rich tax payers who give up U.S. citizenship to reduce taxation upon sale of their assets.)  For tax scholarship, I continue to believe that Moore—arriving in an era in which Justices look to longstanding historical practices and sources of original meaning—heralds a major turn to tax history.  (The longest individual opinion in Moore is Justice Thomas’s dissent, and most of that opinion is his history of the apportionment requirement and the ratification of the Sixteenth Amendment.)

Income taxes are now excise taxes?  Speaking of tax history and tax scholarship:  One big winner from the Court’s opinion is the Jake Brooks and David Gamage theory of the Sixteenth Amendment, which Professors Brooks and Gamage offered in both a recent law review article (forthcoming in the Washington University Law Review) and an amicus brief (approvingly cited in Justice Jackson’s concurrence)—and which now seems to have the endorsement of the Supreme Court.  A central tenet of the Brooks and Gamage view, and seemingly also the Court’s, is that the central purpose of the Sixteenth Amendment was to wash away the 1895 case of Pollock Farmers’ Loan & Trust Co., and thereby restore the understanding of “direct” taxes (which must be “apportioned”) and ‘indirect’ taxes (which must merely be “uniform”) that preceded Pollock.  Many interesting secondary consequences flow from this view, and here I wish to highlight just one:  We should now regard “income” taxes as an “excise” tax for constitutional purposes, rather than a standalone category fashioned out of whole cloth by the Sixteenth Amendment.  (I have made some similar arguments elsewhere.)  This, in turn, suggests a far greater scope to the constitutional term “excise” (and potentially also “duty”) than has been appreciated.

Throwing some shade at a wealth tax.  Some of the debate in Moore was regarded as a kind of elaborate shadowboxing: The real issue, perhaps, was the constitutionality of federal wealth taxation in the United States.  At oral argument, much attention was paid to an exchange between Justice Kavanaugh and Solicitor General Elizabeth Prelogar, in which he asked a hypo that he considered “easy”: “If there were a federal tax on the value of someone’s property, [would] you agree that’s a direct tax . . . that would have to be apportioned, correct or not?”  The Solicitor General immediately conceded that such a tax would need to be apportioned.

It was an interesting concession, and Justice Kavanaugh’s opinion—while noting charily in a footnote that the Court’s analysis “does not address the distinct issues that would be raised by . . . taxes on holdings, wealth, or net worth”—draws explicit attention back to it.  (And he does so, notwithstanding the earlier footnote, while describing Prelogar’s statement at argument as one about a hypothetical tax on “one’s wealth or net worth.”)  The writing was on the wall, and now it is in an opinion.  Will it make a difference?  Time, and probably more litigation, will tell.

TaxProf Blog Op-Eds on Moore v. United States, No. 22–800 (June 20, 2024):

• Lawrence Zelenak (Duke), Moore Thoughts (June 21, 2024)
• Conor Clarke (Washington University), Four More Takeaways From Moore (June 22, 2024)
• Reuven Avi-Yonah (Michigan), Is A Mark To Market Tax Constitutional After Moore? (June 23, 2024)
• John Brooks (Fordham) & David Gamage (Missouri-Columbia), Moore v. United States: Initial Reactions (June 24, 2024)
• Brian Galle (Georgetown), What's Next For Wealth And Mark-To-Market Taxes After Moore?
• Andy Grewal (Iowa), Moore Decides Less (June 26, 2024)
• Michael Graetz (Columbia), Moore v United States—Winning the Battle but the War Goes On (June 27, 2024)
• Alex Zhang (Emory), Moore And The Judicial Role In Tax Law (June 28, 2024)